Investors Sour on NZ Dollar, Fonterra After Milk Scare

When milk goes off, the stench can be pervasive. Much the same can be said about the influence of Fonterra Cooperative Group, the world’s biggest dairy exporter, on markets.

On Monday, asset classes ranging from equities to currencies fell sharply after China halted imports of some of Fonterra’s milk products on fears that they contain bacteria that could cause severe or even deadly food poisoning. Dairy accounts for around a quarter of New Zealand’s exports and Fonterra is the largest supplier, so a lengthy ban would be a major blow for a country that has up to now traded on its reputation as a safe supplier of food.

A batch of baby formula made by Fonterra were taken off the shelves in a Wellington supermarket Monday.

Agence France-Presse/Getty Images

Underscoring investors’ concerns, the New Zealand dollar fell as much as 2.4% against the greenback after Fonterra said tests on some products sold to consumers indicated the potential presence of Clostridium botulinum, which can cause botulism.

Shares in Fonterra’s listed fund dropped by as much as 8.7%. Other locally listed dairy companies Synlait Milk and A2 Corp. also underperformed the benchmark NZ-50 index, which closed up 0.1%.

Nor was the impact limited to New Zealand. Chinese competitors to Fonterra surged on the contamination scare, although those that count on the New Zealand company for much of their raw milk supply suffered.

Andy Bowley, an agriculture analyst at broker Forsyth Barr in New Zealand, said investors in Fonterra were right to be jittery.

In a note titled “Operation Damage Control”, he predicted the company will need to pay for product recalls and compensation for customers.

“The significantly more material reputational and brand damage may be harder to contain, and will take longer to remedy,” said Mr. Bowley, who rates Fonterra Shareholders’ Fund a sell.

This may include the cost of import licenses, customer orders and relationships and the impact on brand value. Regulators could step up their oversight of the company, driving up Fonterra’s cost of doing business, he said.

Analysts are also expecting the Fonterra scare to drag down global dairy prices, and potentially hurt New Zealand’s ability to charge higher prices for their milk products compared to rival suppliers. That premium came under threat earlier this year when Fonterra acknowledged that traces of the chemical dicyandiamide, or DCD, had been found in milk powder late last year, but the market wasn’t told until January.

The main price-setting auction for the international milk industry, known as the GlobalDairyTrade, takes place around midnight local time in New Zealand on Tuesday.

Con Williams, an economist with Australia & New Zealand Banking Group Ltd., said global dairy prices could drop by 10% to 15% in a “short space of time because of the trade issue”. Rival suppliers like Switzerland and the Netherlands could benefit as consumers hunt for alternatives to New Zealand milk.

Another analyst, Rabobank’s Michael Harvey, also warned a volatile market was likely. “There’s been a strong premium for New Zealand origin products (and) there’s probably going to be an erosion of that,” he said.